How Expanding Credit Could Help Fight Climate Change

Narrator: In the coming years, low- and middle-income countries will be richer and consuming more, which will increase overall global energy demands. As the climate fight continues, the adoption of energy-efficient technologies by these emerging markets for everyday items will be even more important to managing the growth of these energy demands. 

One example of this can be found in Nairobi, Kenya, where the primary household energy consumer for low-income households are traditional charcoal stoves used for cooking. There are more efficient and cost-effective stove alternatives that could help in the adoption of energy efficiency, yet the lower-income households have not widely adopted them. 

Joshua Dean: So these charcoal stoves you should think about are kind of metal canisters that you put charcoal in the middle, and then you have a grate that you cook on top of. The charcoal that goes into these stoves in order to provide meals is equivalent to about 14 percent of the income that households earn every week. This is a large amount of the energy that they're currently consuming, and so we think that by helping us understand how they make decisions about whether to adopt an efficient version of that stove or a less-efficient version of that stove, that'll help us get some insights into how we think about the adoption of energy-efficient technologies more broadly in these types of contexts as we go forward. 

Narrator: That is Chicago Booth's Joshua Dean. He and his coauthor, Susanna Berkouwer, worked with the Busara Center for Behavioral Economics in Nairobi to conduct a field study with 1,000 lower-income households in Kenya. The experiment sought to see how well the participants would be willing to adopt a $40 stove, which would use half the amount of charcoal per year as their current stoves, which only range between $2 and $5. The researchers had families fill out an accounting exercise, making clear the potential savings of investing in a more-efficient stove. What they found is that this did not change the behavior of these households. 

Joshua Dean: So we set out to see: Is the reason that households aren't adopting these stoves because the returns are not as good as the engineering estimates promise, so maybe they aren't actually worth the money? Is it because of a financing problem, where households just don't have the money today in order to take advantage of the savings in the future? Or is it that households don't really realize the amount of money that they could possibly save? 

We start out first by randomly assigning subsidies so that the price of the stove is different for different households. Then, by comparing households assigned to pay a high price for the stove with households that pay a low price for the stove, we can causally estimate how much money the stove saves each household. What we find is that the stove saves households $120 a year. That's a 300 percent rate of return or equivalent to one month of income. It's not that the engineering estimates don't match up to reality. This is a really big deal. 

But then we also ask households how much they're willing to pay, and we do this in an incentivized way. Households tell us the most that they're willing to pay, and then we draw their randomly assigned price. If the amount that they said that they're willing to pay is less than the randomly assigned price, they don't get to buy the stove at all. But if the randomly assigned price is below the most that they said that they're willing to pay, they only pay the subsidized price. It's in their best interest to tell us the truth about how much they're willing to pay. 

Narrator: The researchers found that the average price families were willing to pay was only $12, even though the proven cost savings would far exceed that cost. They then went to the next step, seeing what might increase the amount the households were willing to pay for the more-efficient stoves. 

Joshua Dean: Remember, the two things that we set out to study is whether it's that they don't have the money today or whether they don't understand the effects of the stove on their savings. The other treatment that we look at is we offer households a three-month loan at a reasonable interest rate for the area, and that, we find, more than doubles willingness to pay, to $25 for the stove. In fact, the $25 that they're now willing to pay is pretty close to the amount of money that they'll save from the stove over that three-month period. So it seems like households understand the benefits of these stoves, but that they just can't finance them today. 

Narrator: It turns out that access to credit is the primary driver for these households being willing to invest in energy-efficient upgrades. Many wealthy countries have adopted a carbon tax that makes consuming carbon fuels more costly, encouraging households to adopt carbon-neutral energies. 

Joshua Dean: Given that the problem seems to be financing, in that households don't have the ability to pay for the stoves today, targeted credit being provided, or subsidies on the stoves that reduce the upfront cost, are more likely to increase adoption in this context more efficiently than something like a carbon tax that you would recommend in a higher-income context, where people aren't adopting because they don't think the cost and benefits make sense. 

Narrator: Though the adoption of more-efficient stoves isn't truly a noncarbon fuel alternative, incentives, which include financing options for low-income households, could have enormous benefits in the fight against climate change, all of which is possible when access to credit makes a simple, nonhabit-changing, cost-effective, climate-change solution more accessible.